The lending business of banks is facing unprecedented competition. A recent study estimated that nearly $11 billion in bank profits is at risk over the next five years for the lending function. In this whitepaper, we examine the threat to incumbents through the lenses of the Theories of Disruptive Innovation. Our analysis reveals that entrants have indeed established a position in several lending products that are considered as low-end by banks. For example, entrants have achieved success in personal loans, small business finance and student loans. Such entrants pose a disruptive threat to banks. However, the current business model of entrants does not appear to be immediately scalable to the largest market segment in lending—mortgages. This does not mean that they will not attempt this in their own quest for growth. Additionally, there is no shortage in competition even in this segment. A separate category of non-bank lenders is attacking this segment with sustaining innovations that improve customer experience. Faced with this intense wave of competition, incumbent banks must leverage their strengths and move forward to embrace change. In doing so, they can choose from the following strategic alternatives. First, they can partner with entrants to leverage their low-cost business models and offer products that the banks could not profitably offer otherwise. Second, they can explore the option of working with entrants to specifically assist with critical back-end operations like originations and loan servicing, thus playing the role of utility providers of capital. Third, they bank can build a new, independent business unit to respond directly to the competition. As we have seen in countless industries, the potential for disruption should not be underestimated. Considering that these are early days for FinTech entrants in lending, incumbents should look to utilize the principles of Disruptive Innovation to seize the initiative and win.

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Banking on Disruption: Digitization, FinTech, and the future of retail banking

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  • Aroop Gupta
    Aroop Gupta